Private label products are those manufactured by one company for sale under another company’s brand. Private-label goods are available in a wide range of industries from food to cosmetics. Private label brands managed solely by a retailer for sale in a specific chain of stores are called store brands or own brands.
Private labelling is when a supplier or manufacturer produces goods that are retailed, packaged, and sold exclusively by a third party. This means that the first company profits by selling goods to third parties, and the third-party profits by selling to consumers. Private labelling is used widely in today’s eCommerce landscape, including for private label dropshipping.
They are often positioned as lower-cost alternatives to regional, national or international brands, although recently some private label brands have been positioned as “premium” brands to compete with existing “name” brands. Such brands are generally less expensive than national brands, as the retailer can optimize the production to suit consumer demand and reduce advertising costs.
Goods sold under a private label are subject to the same regulatory oversight as goods sold under a national brand. Consumer demand for such brands might be related to individual characteristics such as demographics and socioeconomic variables.
Growing market shares and increasing variety of private label consumer packaged goods is now a global phenomenon. However, private label market shares exhibit widespread diversity across international markets and product categories. Empirical research on private label products has been of substantial interest to both marketing academics and managers. Considerable work has been done on well-defined areas of private-label research such as private-label brand strategy, market performance of private-label products, competition with national brands, market structure, and buyer behavior.
A Food Marketing Institute study found that store brands account for an average of 14.5 percent of in store sales with some stores projecting they will soon reach as high as 20 percent of all sales. Store branding is a mature industry; consequently, some store brands have been able to position themselves as premium brands. Sometimes store-branded goods mimic the shape, packaging, and labelling of national brands; for example, “Dr. Thunder” and “Mountain Lightning” are the names of the Sam’s Choice store brand equivalents of Dr Pepper and Mountain Dew, respectively.
Followings are the different categories of products for private labelling:
- Beverages
- Personal Care
- Paper products
- Cosmetics
- Condiments and salad dressing
- Household Cleansers
- Frozen foods
- Dairy items
Need and Importance
Increased margins:
When you bypass the brand name of a vendor and use private-labeled products, it incurs no extra cost to the vendor.
The vendor has to spend additional money to promote branded products, but if you buy only products and private-label them, then the cost of the product will reduce as they will also save a lot of money that they would have spent on marketing and promotion of the brand.
Reduced Competition:
If you run a retail store where you have to keep the products price according to your competitors, then private labeled products will be a boon for you. Most of the times, you can buy products from a supplier without their label on the products.
You charge any price on those products where your competitors will be selling brand products at discount prices.
In addition to this, you will have full control over the products and you can ask your suppliers to make any kind of changes to products and can address the problems faced by customers with the products.
Compensation Booster:
As private-label products have more profit margins, you can use that money to give to your sales team as a reward for the sales contest of your private label products.
The compensation margin on private-label products is quite high. Therefore, you will end up saving a lot of money, even after giving rewards to your sales employees. The purchase cost of private label products will be less as compared to brand labelled, and you will sell these products in your store at the same cost as branded products.
Customer loyalty:
Nowadays, people prefer locally made products, and if they love your private labelled products, they would want more. You will be the only sources which can provide those products to them. In the retail world, it is difficult to gain the loyalty of people.
As they switch very easily when they are offered better prices in other stores. But private labelling is the best way to make your customers loyal to your products because whenever they want to buy your products, they will come to only you.
Brand builder:
With private labeling, you can start your brand. For instance, if you run a shoe store, then you can sell products related to shoes such as shoe polish, shoe cleaner, and shoe trees with your brand name.
To do this, you can buy products from manufacturers without label and attach your label on them in the store or buy products from the manufacturer who can provide you products with custom-design labelling.
You can create your design, or you can take the services of an in-house art department who can create a design for you as per your wish.
Lower Operating Costs
Private label products have to sell themselves; they are typically items that do not necessarily need advertising campaigns to fly off the shelves. Products chosen should regularly sell at five or six times the manufacturing price. This will leave the manufacturer room to provide the price discounts required of private-label goods. Therefore, most items chosen are cheaper to manufacture and produce in high volume. Since most private label products end up receiving large orders from major retailers, manufacturers yield the benefit of creating and shipping all products to a single customer. Both factors result in reduced operating costs.
Private Labels in India
In India, these private labels are evolving. Earlier brands invested heavily on brand building and leverage on their brand value to sell their merchandise across different retail channels, whereas retailers only created a distribution channel focusing on providing a bridge between manufacturer and customers. As retailers are closely connected to consumers and understand their psychology, they are now in a better position to cater to the needs leveraging on scale and scope, these retailers are developing their own brands. In private labels, the retailers spend a fraction of the brands marketing and brand building expenses, thus are able to provide products similar to brands at a slightly lower price.
Higher penetration of supermarkets/hypermarkets in urban areas has resulted in steady growth in private labels. Earlier, private labels were considered to be an imitation of branded apparel with inferior quality and lower prices. But now-a-days, private labels focus on providing good quality at competitive rates. Due to fewer distribution overheads, lesser number of intermediaries and negligible marketing costs, private labels are able to sell their products up at lower prices than their branded counterpart, thus improving their gross margins.
Shoppers of private label apparels proudly consider themselves as smart shoppers as they evaluate the manufacturer brands with the store brands. They take pride in themselves for focusing on value for money rather than being influenced by the brand status or advertising stunt. Cost-centric consumers are more than happy to swap name brand for private label in their shopping cart, considering private labels as a means to economise spending without compromising on quality.
Private labels are win-win situation for both retailers and consumers. The growth of private labels is directly linked to the growth of modern retail channels. With the emergence of e-commerce in Indian fashion retail, private labels are witnessing a new era of ‘data designed brands’. E-commerce retailers have access to petabytes of enviable data. Information collected by retailers is exhaustive the data goes as deep as ‘what is the data of a person wearing a mandarin collar’, ’what colour works in which region’, ‘what fabric moves the fastest off the shelves’ and ‘what apparel experience the most return requests’. This quality of data is an asset in the ever-changing digital retail market. It offers deep insights into customer taste and preferences, giving retailers strong competitive leverage to create products to suit these preferences.
Growth Drivers Pushing Retailers to Private Label Space
There are certain strengths for the retailers to enter private labels space as follows:
Access to Data: Retailers have access to exhaustive informative data to consumer purchases, preferences and behaviour. Retailers understand what goes into making a seller product. Retailers are in direct contact of consumers and understand their psychology, which gives them an edge over the retail brands.
Cost Competitiveness: As private labels have fewer distribution overheads, lesser number of intermediaries and negligible marketing cost, they are able to sell products at lower rates than their branded counterpart. Competitive rates of private labels in comparison to the retail brands make them attractive among the customers.
Empowering Retailers: Earlier the market was driven by the brands. They were the decision makers. But emergence of private labels has enhanced the bargaining power of the retailer while negotiating with manufacturers and brands.
Market Reach: Brands have their own customer base. With the popularity of multi-brand outlets, the retailers have a better customer base as they have already built their market presence across different retail formats and different geographies. With negligible customer acquisition and retention cost, the retailers have wide spread market reach for their private labels.
Filling the Gap: Private labels are launched to fill gaps in the current product portfolio offered by the brands. With a better knowledge of consumer’s desires and purchasing insights, private labels focus on products as per the demand of the market.
Opportunities
Continued Rise of Corporatized Retail: Indian fashion retail is transforming rapidly and is witnessing a shift from unorganized to corporatized sector. The structural reforms by Indian government like GST are expected to accelerate the penetration of organised retail at a higher rate in the Indian retail market. Factors like rise in middle class with increase in disposable income, change in consumer preference and increasing fashion awareness due to mass media penetration and social media in the country are the driving force for growth of corporatized retail and private labels.
Due to changing consumer behaviour, they are ready to experiment with fashion and thus they look for updated trends in apparels. Private labels give them opportunity to experiment with their fashion without spending much compared to retail brands. This transformation has provided an opportunity to the private label retailers to cater to these consumers.
Increasing Reach of Retail Market to Tier-II and III Cities: Fashion is no more restricted to metros and tier-I cities only. With increasing exposure of tier -II and -III cities to latest fashion trends, the consumers are well aware and are willing to spend more on latest fashion. Retailers have realised this opportunity and have started catering to consumers residing in these cities.
Private label provides an alternative to the consumers without compromising on quality and fashion as private labels are launched keeping in mind the gaps in market, especially those between price, style and quality.
Growth of Digital Penetration: With the proliferation of digital devices in the country coupled with increasing internet penetration, online retail has witnessed a tremendous boost in the recent years. E-tail fashion giants have already started establishing their private labels. They provide ample options along with convenience to their consumers. As e-commerce retail has better reach to tier-II and tier-III cities in addition to metros and tier-I cities, they have an opportunity to cater to larger customer base across different geographies. The data available with these retailers provide them an edge over brick-and-mortar retailer to create the product and pick and choose the exact audience for whom it’s made.
Challenges
Individuality of Private Labels: Customers do not prefer private labels over retail brands. However, if the private label is available from a well-known retailer outlet, the brand name of the retailer weighs on private label. So, the success of private label is highly dependent on their retailer.
Changing Consumer Behaviour: Ever changing shifts in consumer demands and preferences is another challenge for private labels. With rapidly changing profile of consumer in term of their demands and preferences, it has become challenging for retailers to keep up with shifting consumer demand.
Price and Quality Conscious Indian Consumer: The private labels are not cheap but are cheaper in comparison to their branded counter parts. The consumer’s purchase decision is not only driven by the price factor but is influenced by the quality, value for money and fashion trend. Private labels have to maintain quality at competitive rates. With the emergence of private labels by different retailers, competition has increased among the private labels too.
Disadvantages of private labeling
Like everything else in the world, private labeling also doesn’t come with downsides. But if you plan strategically and plan ahead of time, then you can avoid the key drawbacks of private labelling and keep it a profitable business.
Dead inventory:
Sometimes retailers make a wrong choice of products by ordering private label line of products before even knowing whether their customers will like it or not. This can leave you in bad water as you would have inventory difficult to sell.
Branded products are easy to return and easy to get reimbursem*nt for the investment, but you cannot do this with private-labelled products. Then you would have to provide huge discounts to customers to make your customers buy them.
Minimum orders:
“Minimum orders” is one of the basic requirements of the most manufacturer when you ask them to produce customized products for you suitable for private-labelling. Most of the times, this minimum order is such a large quantity that you would not order otherwise.
This problem can only be solved by smartly negotiating with the vendor. Otherwise, you can ask them to provide you extended expiry date on the products, or you can convince them to provide the same product in different colour, shape, or sizes to meet the minimum order requirement.
Customer Perception:
People find it difficult to trust private labelled brands. They have trusted the branded products for a long time, and they believe that private labelled products are of lesser quality than branded products. Therefore, it is advisable for you to perform thorough research on your customers before investing in private-labelled products.
Know their preferences, their likes, and dislikes, and prepare a list of qualities that match with the branded products that your customers desire. Make sure that your product is comparable with the other familiar brands in the market.
Above are the potential drawbacks a retailer has to face while private labelling their products. In this section, you will learn about the different categories of products that can be private labelled to be sold in the market.
